Gold falters on inflation data, rising euro

The metal dips as US consumer prices level off, but some analysts see long-term strength if demand from Asia continues.

By TheStreet Staff Jan 19, 2012 12:14PM

By Alix Steel

 

Updated at 5:12 p.m. ET

 

Gold (-GC) slipped slightly Thursday as inflation in the U.S. stayed in check and as successful bond auctions in Spain and France lifted the euro.

 

Gold for February delivery settled down $5.40 at $1,654.50 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,670.60 and as low as $1,649.20 an ounce while the spot price was down 90 cents, according to Kitco's gold index.

 

Silver (-SI) were closed 3 cents lower at $30.51 an ounce while the U.S. dollar index was down 0.5% at $80.07.

 

Gold prices were choppy early Thursday, buoyed by a weaker U.S. dollar. The currency is under pressure from a stronger euro, which gained steam after Spain and France both raised cash in successful debt auctions.

 

Spain borrowed almost 7 billion euros at strong demand while average borrowing costs were slightly lower at 4.65%; France raised almost 8 billion euros. Demand was very strong and yields fell. France's auction was significant as it was the country's first attempt at raising cash since Standard & Poor's downgraded its triple-A credit rating one notch.

 

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Gold's upswing was short lived after a report that showed consumer prices in the U.S. rose 3% in 2011, the highest increase since 2007 but below the 3.9% seen in September. Inflation can go two ways for gold: Low inflation might give the Federal Reserve more reason to initiate a third round of quantitative easing, as many analysts are forecasting. (More money in the system dilutes the value of paper currency and is typically good for gold.) But if the money isn't making it into the mainstream market, inflation stays low and investors have less need to own gold as a wealth preserver.

 

Jon Nadler, senior analyst at Kitco.com, thinks the Fed will raise interest rates prior to its mid-2013 target date -- "if, in fact, conditions continue to improve at the pace that they are improving at in the U.S.," says Nadler. However, if the positive economic conditions stall or if we see any deflation panic, Nadler would change his opinion.

 

One potential positive factor for gold is news that China will push its 5 largest banks to ramp up lending by 5% in the first quarter. The expectation is that China will also lower the amount of cash banks have to keep in their coffers, an attempt to spur growth. China might also lower capital requirements for lenders to help pump more money into the system.

 

"Additional Chinese easing -- even if largely anticipated -- is positive for risk assets and . . . for gold prices," says James Steel, analyst at HSBC Capital Markets. China ramped up buying in 2011, importing 389 tons in the first 11 months of the year with 103 tons in November alone. Many experts, however, are worried that demand will weaken after the Chinese New Year, which starts Jan. 23.

 

Steel says he doesn't see a short-term catalyst for gold prices -- he attributes the latest move to a stronger euro due to short covering -- but says strong buying out of China can continue to support gold over the longer term. "Data from the National Bureau of Statistics show that of China's 1.35 billion people, 51.3% lived in urban areas at end-2011," says Steel. "Historically, a country's gold consumption tends to increase with urbanization, which promotes rising living standards and gains in real income."

 

Steel also says that India's real output per person in 2012 is expected to be 34% compared to 2007, while China's will increase 50%. Typically, the more money people have in emerging market countries with histories of buying gold, the more bullish that is for the metal. But demand in India has recently suffered as the rupee fell 15% vs. the dollar in 2011 and with gold prices up 25%, in rupee terms, from July to December.

 

The latest effect of India’s higher import taxes on gold, now 2% of the price, also remains to be seen. Jewelry demand in the country fell only 3% in 2011 due to strong buying in the first half of the year, which offset significantly weaker demand in the third and fourth quarter, but that trend might be crimped due to these higher taxes.

 

Neil Meader, research director at Thomson Reuters GFMS, says that this year will see less wedding festivals than 2011, which might leave consumers will less reasons to buy gold.

 

Gold mining stocks, including Barrick Gold (ABX) and Newmont Mining (NEM), closed lower Thursday.

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